Soft Money Political Spending by 501(c) NonprofitsTripled in 2008 Election

527 Political Group Spending Declined, But Still Accounted for Half
of $400 million in Outside Soft Money

527s Favored Democrats, 501cs Republicans

Mixing and Matching Hard and Soft Money

Fueled by unlimited “soft money” donations, Section 501(c)nonprofit groups and Section 527 political organizations spent morethan $400 million in the 2008 federal elections. This figure is largelybased on CFI’s analysis of Federal Election Commission (FEC) andInternal Revenue Service (IRS) reports. Since public disclosure of501(c)s’ partisan activities is incomplete, we also analyzed grouppublic statements, press reports, and past spending patterns, andinterviewed a number of group representatives.

Our $400 million estimate represents amodest drop from 2004 when federal 527s alone disbursed $426 millionand 501(c)s probably spent less than $60 million according to previousCFI research.1In an unusual election where the Democratic presidential candidateraised astounding amounts of money, both major candidates discouragedsoft money support, and the gathering recession discouraged someprospective wealthy individual donors, outside soft money still made abig impression -- particularly in close Senate and House races.

What has changed dramatically since 2004 has been thebalance between the two main categories of outside group soft money.Influenced by regulatory changes as well as political circumstances,federal 527s spent $200 million, only half of what they did in 2004,but 501 (c) (4) social welfare groups, (c) (5) labor unions and (c) (6)business leagues disbursed at least three times as much as in 2004 or2006. (501 (c) educational, religious and charitable groups areprohibited from engaging in partisan campaign intervention)

Nothing illustrates this development moreclearly than the advent of Freedom’s Watch, the $30 million 501(c) (4)group that was the second largest pro-Republican soft money group. Itsfinances fell midway between those of the two top 527s supportingGeorge W. Bush in the previous election, Progress for America VotersFund and Swift Boats Vets and POWs for Truth. Some groups that hadutilized 527s in recent elections -- such as Pharmaceutical Researchand Manufacturers of America (PHARMA, the prescription drug industryassociation,) which financed America’s Agenda: Health Care for Kids,and the U.S. Chamber of Commerce -- now carried out similar programsthrough their 501(c)s. Others, including League of Conservation Voters,Planned Parenthood and Sierra Club, continued to utilize both majorvehicles but rebalanced their efforts towards their 501(c)s.

If Democratic-oriented 527s dominated thesoft money system in 2004, the rise of the 501(c)s in 2008 has evenedthe partisan balance. Democratic-leaning 527s, largely financed bylabor unions and wealthy individuals, held more than a 2-1 advantageover Republican-oriented ones. But among 501(c)s, Republican-inclinedgroups -- mainly backed by businesses and wealthy individuals --maintained the same edge over their pro-Democratic rivals.

These findings pose a challenge to campaignfinance reform groups who want the Democratic-controlled Congress tobring the predominantly Democratic-leaning 527s under essentially thesame “hard money” contribution limits as Political Action Committees(PACs). Such legislation could however leave predominantlyRepublican-oriented 501cs -- who pursue essentially the same campaignactivities as 527s -- an open field. (This is especially the casebecause tax laws give the predominantly labor union funders of 527sstrong financial incentives to use 527s rather than 501cs for theirpolitical operations).

Our research contributes new insights to thelongstanding debate over which politically active groups ought to besubject to contribution limits. According to the Internal Revenue Code,Section 527 political organizations have the “primary function” ofinfluencing elections and appointments to public office. Section 501(c) (4), (5) and (6) nonprofits may pursue the same objectives as longas this is not their “primary” (e.g. 50 %+) activity. None of thesevarious soft money groups have been found to meet the FEC’s thresholdsfor regulation as PACs (especially making $1,000 in “express advocacy”expenditures and having “the major purpose” of influencingfederal elections). Yet we judge that most soft money spending by501(c) s and 527s is by organizations containing commonly managed PACs or receiving their principal financing from suchgroups.

Consequently, under the current campaign finance regime, a 501(c)corporation or union is legally confined to gathering only limitedindividual contributions for its “connected” PAC in order to preventcorruption or the appearance of corruption of elected officials. Thesefunds can use be used, among other things, to make contributions tocandidates and expressly advocate their election. The same corporationor union is allowed to channel additional, unlimited treasury and donorfunds through 527s and 501cs to support candidates in other ways --such as financing TV and radio ads and on-the-ground “voter education”about the wrongness of their opponents’ positions.

Similarly, we found that individuals whodonate without limit to 527s (and the few such donors to 501(c) s thathave been disclosed) also make large, legally limited contributions tocandidates, parties and PACs.

The close integration of the soft and hardmoney systems raises the question of whether the former undermines theanti-corruption effects of the latter.

The 501(c) s

As Table 1shows, we were able to document $196 million in estimated 501(c) groupsoft money campaign spending in the 2008 federal elections. We havelittle doubt that the real figure is in excess of $200 million. We lackcredible estimates for spending by at least three groups reported tohave conducted multimillion dollar campaigns: Committee to DefendAmerica, Americans United for Change and National Right to LifeCommittee2.Furthermore, even 501 (c) spending that is subject to FEC reportingrequirements does not include expenses for administration, fundraising,and polling.

Election Activities and Political Purposes

Under FEC regulations, certain 501(c) s can use unlimited contributionsfor three main kinds of campaign spending:

(1) 501(c) (4) “ideological”corporations – those which do not take corporate or union money, haveno shareholders and do not receive business income -- may make “expressadvocacy” appeals to the general public to vote for or againstcandidates, so long as this does not constitute “their major purpose”

(2) 501 (c) (4),(5) and(6) organizations maymake certain TV and radio, “electioneering communications” that namecandidates and are distributed in the relevant constituency 60 daysbefore a general election or 30 days before a primary one as long asthey are not the "functional equivalent of express advocacy."

(3) These groups are free to make an evenbroader class of similar communications to TV and radio voters outsideof the above “window” periods, distribute other non-express advocacymessages concerning candidates via newspaper and Internet ads, directmail, email, telephone and canvassing, and pay for related polling andmarket research

With regard to categories (2) and (3),representatives of 501(c) groups often state that they are simplypromoting “issues” during elections when Americans naturally pay moreattention to policy. Yet those responsible for most of the spendingcandidly acknowledge that they are also attempting to educate, motivate andinfluence “voters” in “key elections.” For example, in a post-electionpublic forum, Freedom’s Watch’s Vice-President for Communications, EdPatru, discussed four representative group ads. Regarding an adattacking Oregon Senate Democratic candidate Jeff Merkley’s support for“higher taxes,” he explained,

We found from our polling that because GordonSmith, the Republican, was tying himself so closely to Obama, it wasturning off a lot of conservatives, Republicans, specifically males.And so, the purpose of this ad was designed to make inroads, or winback sort of those conservatives, independent males, particularly youngmales.

Patru made similar points for the other ads,such as one criticizing a Democratic congressional candidate in Nevada:“…We wanted to accomplish two things: one to drive home the point thatDina Titus is synonymous with tax hikes; and two, we wanted to make itmemorable, so that when people -- so after the ad came down -- peopleremembered Dina Titus and tax hikes.”3

Tom Donohue, President of the Chamber of Commerce of the U.S. -- thebiggest 501(c) in the 2008 election -- “said the Chamber is focusing onkey Senate races to ensure Democrats do not have a filibuster-proofmajority.”4 “We certainly are engaging very much in congressional races,” added another Chamberofficial5.The Coalition for a Democratic Workplace – a coalition of 501 (c) (6)business groups opposed to a “card check” bill aimed at facilitatinglabor union organizing -- noted on its website that its TV ads weredirected at “swing voters” and aired “during key primaries.”6Richard Berman, head of another important anti-card check group,Employee Freedom Action Committee, observed, “Our strategy is simple.I’m trying to make this a defining issue for voters in their particularraces.”7 On the other side ofthis issue, a spokesperson for American Rights at Work said its adswere designed to “combat” those of the above organizations which wereaimed at “defeating Democrats.”8

Other groups offered similar campaign rationales. The liberalorganization Health Care for America Now announced that it was focusingon seven, competitive Congressional districts (including one Senaterace) to “make sure voters really understand the importance of qualityhealth care for all and the issues at stake in these elections.” Itsaid, “We’re very proud of these ads, and we’re confident they aregoing to make sure people know which side those running for office inthese places are on.”9Outlining its environmental “voter education” effort, which appears tohave been undertaken by both its 527 and its 501(c) (4), the SierraClub emphasized its “independent direct contact program that’s reachedtens of thousands of targeted swing voters in key battleground states.”10The head of the National Rifle Association’s 501(c) political operationstated, “We intend to find, educate, register, and turn out tens ofmillions of gun owners to vote this year.”11And the anti-abortion Susan B. Anthony List referred to its “votereducation and mobilization campaign” entitled, “When Women Vote,Pro-Life Candidates Win.”12

Close to half of this spending was byliberal “pro-choice” and environmental groups, like Planned ParenthoodAction Fund and League of Conservation Voters Inc., that have beenusing this vehicle for some time. The remainder was undertaken by amore recently arrived set of actors pursuing more general“conservative” or “progressive” goals, groups with names such as“American Issues Project,” “Let Freedom Ring,” “Progressive FutureInc.,” and Advancing Wisconsin Inc.” This form of campaign interventionhas become increasingly attractive because it represents the only meansby which soft money groups can run express advocacy (“vote for” or“vote against”) ads right before elections. In addition, there is norequirement to disclose donors unless the donors specifically earmarkfunds for the ads (few do). This opportunity however is restricted to501(c) (4) groups that can meet stringent criteria, particularly thatof no corporate or union financing.

Electioneering Communications

Of the $81 million in 501 (c) group Electioneering Communications, $55million came from the top four spenders. Three of these groups werebasically backed by business (U.S. Chamber of Commerce, America’sAgenda: Health Care for Kids (see below), and Americans for JobSecurity), and the fourth (Freedom’s Watch) was reported to have beenfinanced mainly by billionaire tycoon Sheldon Adelson.13

Looking at representative 501 (c) electioneering communications in the2008 elections, we found that the overwhelming majority of TV or radiospots:

Focused significantly on a candidate (challenger or incumbent);

Aired in places with competitive races;

Connected a candidate to an “issue, generally without reference to specific, pending legislative or executive action. (Moreover, no ads we could find referred to actions likely to occur before the election). Instead, ads highlighted the candidate’s general policy stance, such as “raising taxes” or “working for better health care,” or underlined the candidate’s past votes or positions;

Sometimes cast aspersions on the candidate’s character said to be related to the “issue” – such as an alleged failure to pay taxes or subservience to special interest campaign contributors;

Usually called upon the audience to contact the targeted candidate -- at a quickly flashed phone number -- to support the ad’s point of view; and

Were not part of a preceding series of communications by the sponsor on the issue.

Here are two representative examples:

In the Minnesota Senate race, the U.S. Chamber of Commerce ran an ad that begins with light, old fashioned show business music and a photograph of former comedian and Democratic candidate Al Franken with duct tape over his mouth. As the tape is removed to reveal a crooked smile, the narrator comments, “High taxes hurt. But it seems like every time Al Franken opens his mouth he talks about raising taxes. This from a guy who was caught not paying his own taxes in 17 states.” The narrator continues, “Maybe he shouldn’t open his mouth” (the tape is restored) and concludes by urging viewers, “Tell Al Franken that high taxes aren’t very funny, “while Franken’s phone number flashes by.14

In the Presidential race, a Health Care for America Now ad featured a woman walking through a neighborhood of row houses and American flags. “I’ve never faced an enemy like cancer, but it’s OK,” she declares. Then she criticizes Republican candidate John McCain’s health plan under which “20 million people could lose their insurance at work; I could be one of them…He wants me to fight cancer and the insurance companies? Fine, I’ll take you both on.” A narrator exhorts viewers to “ask Senator McCain which side he’s on.”15

In 2003, the Supreme Court had exactly these kinds of ad in mind when it upheld, in McConnell v. FEC, the Bipartisan Campaign Reform Act’s (BCRA) prohibition of corporate and union financing of electioneering communications:

While the distinction between “issue” and express [i.e. “vote for” or “vote against”]advocacy seemed neat in theory, the two categories of advertisementsproved functionally identical. Both were used to advocate the electionor defeat of clearly identified federal candidates… Little differenceexisted, for example, between an ad that urged viewers to “vote againstJane Doe” and one that condemned Jane Doe’s record on a particularissue before exhorting viewers to “call Jane Doe and tell her what youthink.”16

However corporate or union financing of such “Jane Doe” ads is nowpermitted in the aftermath of the Court’s 2007 decision in Wisconsin Right to Life v. FEC andparticularly ensuing changes in FEC regulations. In his decisiveopinion, Chief Justice John Roberts declared that to safeguard “theliberty to discuss publicly and truthfully all matters of publicconcern without previous restraint or fear of subsequent punishment… acourt should find that an ad is the functional equivalent of expressadvocacy only if the ad is susceptible of no reasonable interpretationother than as an appeal to vote for or against a specific candidate.”17In exempting ads that did not meet this criterion from BCRA’sprohibition, the opinion did not claim that such ads were not at leastin part voting appeals, only that that was not their only reasonable interpretation.

What Roberts meant by “reasonable” was somewhat unclear, especially asa footnote in his opinion seemed to suggest that an ad condemning “JaneDoe’s record,” like that identified in the earlier case, mightreasonably be interpreted as an appeal for or against a candidate, andtherefore subject to the prohibition against corporate and unionfinancing.18 In the end, it was the FEC’s new rules to implement the WRTL decision that allowed 501 (c) corporations to finance the “vote against Jane Doe” 2008 election ads described above.19

The FEC also decided not to require disclosure of donors to 501(c)corporations’ and unions’ permissible electioneering communicationsunless the donor specifically earmarked the money for the ad. Arguingthat donors to nonprofit corporations did not necessarily support theirelectioneering communications, and that a disclosure requirement wouldbe “burdensome,” the Commission required no accounting of the sourcesof funds used for such ads.20The situation remains different for unincorporated groups such as 527political organizations that make the exact same kinds ofcommunications. These organizations must either reveal all their donorsor establish a segregated fund to finance the ads and identify all itsdonations.

Only a few 501 (c) electioneeringcommunications in 2008 parted from the pattern described above. Notincluded in Table 1are ads by AARP, ONE, and Environmental Defense Action Fund. Thelatter, for example, ran a TV ad in New Hampshire entitled, “Stand Upto Big Oil.”21 It begins byexplaining that “Big Oil” is using its “record profits to lobby SenatorJudd Gregg to “oppose the bipartisan Climate Security Act.” Afterdetailing the virtues of the bill, it notes that Gregg supported it in2003 and 2005. It concludes by urging viewers to “tell him to keepstanding for New Hampshire’s future by standing up to Big Oil.” Unlikenearly all other electioneering communications, this one did notclearly condemn or praise the Senator who was portrayed as havingvoting correctly in the past, but under pressure to change his vote dueto “Big Oil” lobbying. Gregg was also not facing an election until2010. A further major difference was that the Climate Security Act wasbeing considered by the Senate and was voted on within two weeks of thead in New Hampshire, and Environmental Defense had demonstrated anongoing commitment to the legislation in past public communications

Our $89 million figure for this category is “softer” than our data for other categories in Table 1which were drawn from official disclosure reports. Still we presentthis as a relatively high confidence rounded estimate. It is based ongroup public statements, press reports of non-officially reportedactivities, CFI interviews with several leading group representatives,and comparisons with previous CFI reports on past 501(c) electionexpenditures. Of the $89 million total, $76 million was accounted forby six business or conservative-backed groups: U.S. Chamber ofCommerce, Freedom’s Watch, Employee Freedom Action Committee, NationalRifle Association, and Coalition for a Democratic Workplace and SusanB. Anthony List.

Soft money organizations are often viewed as isolated, independentorganizations. But that image is misleading. Of twenty-seven 501(c) sthat spent over $1 million, twelve had PACs as separate but commonlymanaged components. About half of soft money spending was by groupswith PACs (See Table 1).In addition, some major groups were largely financed by organizationswith PACs. For example, America’s Agenda: Health Care for Kids wasentirely financed by PHARMA, the prescription drug industry tradeassociation, which has a PAC as do its leading members. Although 501csgenerally are not required to reveal their donors, the Coalition for aDemocratic Workplace, American Rights at Work and Health Care forAmerica Now have all been reported to have leading “members” that havePACs. There is little doubt that the majority of 501(c) soft money isspent by organizations that have PACs or receive most of their fundsfrom organizations with PACs.

So a 501 (c) corporation or union canestablish a limited contributions/ financially disclosed PAC which may,among other things, donate to candidates or expressly advocate theirelection. The same 501 (c) can channel unlimited, undisclosed treasuryor donor funds to “electioneering communications,” ground warcommunications in support of the same candidates and, in certain cases,independent express advocacy.

The 527s

Unlike 501(c) groups that are required to publicly disclose onlycertain expenditures and almost no donors, 527 political organizationsfall under an extensive disclosure regime similar to that of PACs. Table 2presents the details of contributions of $213 million and expendituresof $202 million by federal 527s in the 2007-08 election cycle.

As a point of comparison, federal 527s spent$426 million in the 2004 cycle and $143 million during the 2006 one.The 50% decline in expenditures since 2004 reflects both politicalcircumstances and regulatory developments. Unusually potent fundraisingof the Democratic Presidential candidate obviated the kind ofpro-Democratic 527 effort mounted by America Coming Together, the MediaFund and Moveon.org Voter Fund in the 2004 election. Also, both majorpresidential candidates presented themselves as reformers opposed toanything like the earlier 527 presidential wars. Influential regulatorychanges included a moderate tightening of FEC restrictions affecting527s (click here to view CFI’s previous analysis) and a substantial loosening of constraints on 501(c) organizations as discussed above.

If 501(c) s undoubtedly spent somewhat more on federal elections thanthe $196 million we documented, 527s spent somewhat less than the $202million above. CFI’s designation “Federal 527s” generally refers togroups that were pretty thoroughly committed to influencing federalraces. But it also encompasses a few groups, mainly labor unions, thatwere substantially involved in not only federal but also state andlocal campaigns. With these groups, it is also difficult to discernwhether expenditures for state political parties or labor councils andaffiliates in presidential or other “battleground states” are destinedto affect federal or state elections. It is also noteworthy that onemajor 527, American Solutions for Winning the Future ($23 million inexpenditures), was led by a prospective presidential candidate -- NewtGingrich, -- who ultimately chose not to run. American Solutions’ majorexpenditures – half of which were on fundraising and airlinetransportation --. appear to have dealt with issues and communicationsrather than partisan politics. The bottom line is that while 527scontinue to be important, they probably spent less on federal electionsthan 501(c) s in 2008.

Election Activities and Political Purposes

With their primary mission of influencing elections (and appointments),527s engaged in basically the same election activities as 501(c)s --except for Independent Expenditures which can be conducted only bycertain 501 (c) (4)s.

On the Democratic side, groups like PatriotMajority, Alliance for A New America, Majority Action, AmericanLeadership Project, and Campaign Money Watch ran candidate-centered TVand radio ads in competitive races while groups like America Votes, theService Employees International Union and Change to Win conductedsignificant ground campaigns. In this latter arena, America Votes wasthe leading force. It coordinated over 40 groups that made more than 62million voter “contacts” including door knocks, phone calls andespecially a large mail program. It emphasizes that President Obama won12 of 14 states in which it was active while Democrats picked up atleast five Senate seats.

Republican-oriented 527s were mainly on theair, particularly RightChange.com, Club for Growth.net, andBornAliveTruth.

The Partisan Divide

Democratic-oriented groups spent $143 million and Republican-orientedones $56 million. This was the mirror image, almost to the dollar, of501(c) spending which favored Republicans.

527s’ Related PACs and Donors with PACs

Most of the 527 soft money was spent by groups with affiliated PACs, as Table 2indicates. The largest two Democratic 527s alone (Service EmployeesInternational Union Political Education and Action Fund and AFSCMESpecial Account) -- which supplied 30% of net 527 funds – both hadmajor PACs. Moreover, numerous major 527s, such as Change to WinPolitical Education, three different “Patriot Majority” groups,Majority Action, American Leadership Project, and Working for WorkingAmericans received of their contributions from labor unions withaffiliated PACs.

As with 501(c) s, most 527 soft money wasspent or channeled by groups that were integral parts of organizationsdispensing hard money as well.

Contributions to 527s and 501(c) s

Table 3presents 139 $75,000 and up individual donors to 527s who contributed$63 million. Just fourteen individuals who provided between $1 millionand $5.5 million accounted for $34 million of this total. For nearlyall of the $75,000 and over donors, 527 was part of a broader electionstrategy that included very substantial donations of “hard money” tocandidates, parties and PACs. They donated an average of $72,000 inhard money supplemented by an average of $450,000 in soft money. Of the139 donors, 17 also bundled hard money contributions for presidentialcandidates.

Only fragmentary official data is available on 501 (c) donors. Table 4presents information on 13 officially disclosed individual donors. Theyshow a similar pattern of mixing hard and soft money. Two of thesedonors were also presidential bundlers.

Campaign Finance Stovepipes and The Real World of Politics

The campaign finance regime consists of three major stovepipes. Ofthese, the oldest and most visible is that of hard money featuringcandidates, political parties and PACs under the supervision of theFEC. Then there are the soft money 527s, relatively recent arrivalslightly supervised by the IRS but filing some reports with the FEC.Finally, we have mainly new upstarts, 501 (c) (4) s (5) s and (6) swhose political activities have hardly even been noticed by the IRS andwho also occasionally file with the FEC. A major theme of this reporthas been that these stovepipes obscure political reality and obstructcoherent thought about critical campaign finance issues.

Real world political actors see the worldmore clearly. An instructive example is provided by Catalist, a threeyear old limited liability corporation which produces a nationaldatabase of approximately 230 million voting age Americans. This voterfile integrates data on individual voting history with consumerinformation, helping campaigns define their target audiences andproduce effective messages. Catalist sells its data to “progressive”organizations in all the stovepipes. Its most recent clientlist includes the Obama campaign, the Democratic Congressional andSenate Campaign Committees, and a range of 501(c) and 527 groups foundin Tables 1 and 2, (many of which have PACs or are funded by groups with PACs). Here are some of their tributes on Catalist’s website:

“For Planned Parenthood and our Action Fund, Catalist is proving to be an indispensable tool for targeting voters, supporters and even volunteers. Using Catalist, we were able to build a national model of pro-choice women voters, then reach a million of these women in targeted states to help elect Barack Obama, make substantial gains in Congress…”

“Over the past two years, Catalist has become such an integral part of the way in which SEIU communicates with our members and the general public on politics that it is now truly indispensable. Catalist’s talented staff and enriched data have helped SEIU target the right voters in the right place at the right time when it really matters.”

“Catalist is an invaluable resource that has helped us [The Sierra Club] better pinpoint the targeted universes we need to reach according to the specific theme and messaging of our programs.”22

Among Catalist’s “investors” are George Soros and other unidentified“partners” of “Democracy Alliance,” a progressive “donors cooperative”which has continually recommended Catalist for funding.23 Soros certainly represents the type of both large hard and soft money contributors portrayed in Table 3.From one perspective, Catalist might itself be considered a de factononprofit as well because it has operated at a loss for over threeyears.24

In campaign finance as well as other areas, thinking in terms of thereal world rather than stovepipes would help clarify the policy choiceswe have made and will confront in the future.*

This report was written and researched by Steve Weissman and Suraj Sazawal with data assistance by Brendan Glavin.